Technology has been one of the best-performing sectors in 2017. The Technology SPDR (NYSEARCA:XLK) has returned 9.1% as compared with S&P 500’s gain of 5.2% on a year-to-date basis. (Read More: 5 Hottest Tech ETFs of 2017)The sector is well poised to flourish driven by improving macro-economic conditions in the U.S and global markets. The rebound in U.S. economy, as evident from an improvement in GDP numbers, the Consumer Confidence Index, unemployment rate and factory activity data presents significant growth opportunity for Technology stocks.
Moreover, sector-specific factors like rapid adoption of cloud computing, growing demand for Artificial Intelligence (AI) applications and expanding usage of Internet of Things (IoT) at home, office and car are key catalysts.
Robust Projections Drive Tech Stocks
The rapid evolution of hybrid cloud (combination of on-premise servers and public cloud servers) is an important factor behind the adoption of cloud computing among enterprises, primarily due to faster data transfer and heightened privacy. Per Gartner “Organizations that adopt hybrid infrastructure will optimize costs and increase efficiency.”
Per MarketsAndMarkets projections, the hybrid cloud market is estimated to grow at CAGR of 22.5% over 2016-2021 time frame. In dollar terms, the market will grow from $33.28 billion in 2016 to $91.74 billion by 2021.
Meanwhile, demand for AI-based applications has gained immense popularity among enterprises owing to its positive effects on operations. According to Accenture (ACN) AI-based technologies “is projected to boost labor productivity by up to 40% by fundamentally changing the way work is done and reinforcing the role of people to drive growth in business.”
The advancement in AI tools and related applications like Big Data analytics, Natural Language Processing (NLP), Machine Learning and Deep Learning are primarily responsible for AI’s massive growth projections. Per MarketsAndMarkets data, the overall AI market is anticipated to be worth $16.06 Billion by 2022, growing at a CAGR of 62.9% within the 2016- 2022 time frame.
Projections for IoT are also significantly bullish. According to Forbes, which quoted BCG data, spending on IoT technologies, apps and solutions will reach almost $267 billion by 2020.
Tech Stock Earnings Momentum to Continue
The technology space continues to be investors’ favorite owing to its dynamic nature. The improving macro-environment, solid underlying fundamentals and impressive growth opportunities have been primarily responsible for the sectors’ earnings momentum, which is expected to persist in the first quarter.
According to the latest Earnings Preview, the sector’s total earnings are expected to grow 10.7% from the same period last year on 6.2% higher revenues. This is higher than 9.2% earnings growth witnessed in fourth-quarter 2016 on a 5.6% increase in the top line.
How to Make the Right Pick In Tech Stocks
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings could be a daunting task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Let’s take a look at four technology providers that have the right combination of elements to post an earnings beat this quarter:
Mitek Systems, Inc. (NASDAQ:MITK) – San Diego, CA-based Mitek Systems develops, markets and sells mobile capture and identity verification software solutions for enterprise customers worldwide. Notably, the company has beaten the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 131.25%.
This Zacks Rank #2 stock has an Earnings ESP of +50%. The company is expected to report second-quarter 2017 results on Apr 27.
TE Connectivity Ltd (NYSE:TEL) – Switzerland-based TE Connectivity manufactures and designs products that connect and protect the flow of power and data inside millions of products used by consumers and industries. We note that the company has beaten the Zacks Consensus Estimate in the trailing four quarters, with an average positive earnings surprise of 6.67%.
This Zacks Rank #2 stock has an Earnings ESP of +0.94%. The company is anticipated to report second-quarter 2017 results on Apr 19.
Seagate Technology PLC (NASDAQ:STX) – Dublin, Ireland-based Seagate is the second-largest manufacturer of hard disk drives (HDDs) in the U.S. We note that the company has beaten the Zacks Consensus Estimate in three out of preceding four quarters, with an average positive earnings surprise of 3.28%.
The company is set to report third-quarter 2017 results on Apr 26. Currently, Seagate has an Earnings ESP of +3.77% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
KLA-Tencor Corp (NASDAQ:KLAC) – Headquartered in Milpitas, CA, KLA-Tencor is one of the world’s leading suppliers of process control and yield management solutions for the semiconductor, and related microelectronics industries. We note that the company has beaten the Zacks Consensus Estimate in the preceding four quarters, with an average positive earnings surprise of 14%.
This Zacks Rank #2 stock has an Earnings ESP of +2.60%. The company is expected to report third-quarter 2017 results on Apr 25.
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